Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Shanghai Xujiahui Commercial (SZSE:002561), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shanghai Xujiahui Commercial, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0036 = CN¥8.7m ÷ (CN¥2.6b - CN¥237m) (Based on the trailing twelve months to September 2024).

So, Shanghai Xujiahui Commercial has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 3.9%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Xujiahui Commercial's ROCE against it's prior returns. If you'd like to look at how Shanghai Xujiahui Commercial has performed in the past in other metrics, you can view this free graph of Shanghai Xujiahui Commercial's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Shanghai Xujiahui Commercial's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Shanghai Xujiahui Commercial to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 31% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Shanghai Xujiahui Commercial does have some risks, we noticed 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

While Shanghai Xujiahui Commercial isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.